New Residential Construction Loses Ground

Housing starts tapered in August, coming in at a seasonally adjusted annual rate of 1.42 million; that’s a 5.1% drop from the previous month. The drop was entirely due to the loss of multifamily starts; single-family starts hit one million for the second time this year and only the third time since July 2007. Single-family gains were strongest in the West and the Midwest.

Investment in multifamily properties is dwindling but builders will keep building as long as the funds are available. Multifamily housing starts are a more volatile figure, so it is too soon to speculate if the investment is flatlining. Poor weather in the South, the strongest region for residential construction, contributed to the loss in building in August.

Building permits came in at a seasonally adjusted annual rate of 1.47 million, almost 1% lower than last month and about flat from year-ago levels. Permits for one or two-unit buildings rose on a monthly and annual basis; however, permits for buildings with five or more units were off by double digits. Only in the South did permits for multifamily dwellings increase. Permits for single-family homes rose in most regions, barring the Northeast, where they remained flat over the month.

Home builders sentiment, as measured by the National Association of Home Builders, came in at a record-breaking 83; present sales led the gains, while sales six months from now and traffic from prospective buyers hit new highs. Builders are facing challenges from high lumber prices, which are running about 170% higher than mid-April. The wildfires in the West, one of the larger lumber producing regions in the U.S., could damage supplies further, but producers have not yet been able to access their mills to assess the total damages incurred.

Mortgage applications fell in the week ended September 11, with applications to refinance and to purchase both dropping. While mortgage rates remain low, the slowing in applications signals a softening in home purchase activity going into the last few months of 2020. The boost from pent-up demand after lockdowns eased is waning.

In the multifamily market, uncertainty is rising over renters’ abilities to pay rent since federal support lapsed. According to the National Multifamily Housing Council (NMHC), rent collections were fairly stable in September with about 86.2% of households paying rent by the middle of the month; in August that figure was 86.9%. Some areas of the country are experiencing higher demand for rentals. At the same time, the downtown areas in seven major cities, New York City, Chicago, Miami, San Francisco, Los Angeles, Seattle and Portland are losing residents for rental properties. Upfront concessions (free months rent) in the larger buildings are a signal of poor market health. (NMHC tracks professionally managed apartments, which make up about half of all apartments in the U.S.)

In a survey from the Census Bureau, which includes all rental markets, about 60% of renters were able to make rent by the end of August using traditional income methods; 32% used stimulus checks while 20% used unemployment insurance (UI) benefits. About 25% of households surveyed have little to no confidence in being able to make rent payments in September.

Fiscal support in the form of stimulus checks and enhanced UI benefits allowed households to make critical payments when the national unemployment rate was skyrocketing. Since that support ran out at the end of July, there has been an erosion in confidence about rent payments for the rest of the year.

The number of households renting by choice was at an all-time high until the pandemic hit. Now that the luster of some major cities has dimmed, many have moved in with family or friends. The share of young adults living with their families has hit Great Depression highs at 52%. Smaller property owners are feeling most of the pain from the loss in demand and increased vacancies. Evictions remain low due to government mandated moratoriums but the rules are ambiguous so many renters are not aware. Evictions have risen in some places hit hard by the virus and lockdowns. The loss in revenues will be felt even more in the fourth quarter when landlords have trouble making their mortgage payments.

Bottom Line
The risks to the housing market are to the downside; however, this sector is still a bright spot to potentially drive the economy out of recession. Builders are still on track to construct more single-family homes than a year ago but increasing headwinds from higher costs, slowing demand and the lack of new federal aid could drag on activity as we enter the new year, especially as more furloughs become permanent job losses.

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